Capital Gains Tax Changes

Following enormous spending in 2020 due to Covid-19, The Government is considering tax increases to raise revenue to mitigate the debt burden and it has been widely reported that Capital Gains Tax is very much at the top of the list and where the Chancellor is seeking to make increases.

Capital Gains Tax is levied on the profit made on the sale of a non-inventory asset. The most common capital gains are from the sale of stocks, bonds, precious metals, real estate, and property.

The OTS (Office of Tax Simplification) has currently concluded its first report following a request by the Chancellor to:

‘seek opportunities in administrative and technical issues as well as areas where the present rules can distort behaviour or do not meet their policy intent’

The OTS determined that Capital Gains Tax as it currently stands “can distort behaviour” as individuals seek to lower their liabilities and that tax could be significantly increased to be aligned with income tax. It also proposes that exemptions be reduced, which would also increase liabilities, and consequently revenues.

ONS recommendations on Capital Gains Tax are:

  • Bring into line Capital Gains Tax with Income Tax
  • A reduction in the annual level of Capital Gains Tax exemption (could be reduced as low as £2,000 – £4,000)
  • Removing Investors’ Relief
  • Ending Business Assets Disposal Relief
  • Removing Inheritance Tax uplift
  • Reducing Capital Gains through shares received

What does this mean?

Implementing these recommendations will have an extensive impact on most taxpayers.

For example, the sale of a business could trigger a much higher CGT liability, as could the sale of shares in a business as well as share option schemes could also be impacted.

Other Issues to consider are Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief) and Investors Relief. The OTS recommendation of replacing Business Asset Disposal Relief with relief more focused on retirement means that the tax paid on the sale of eligible businesses will effectively double the Capital Gains Tax paid from 10% to 20%.

Investors Relief, which applies to gains made on the disposal of investments in ordinary shares may come to an end, effectively cutting the Capital Gains Tax by 50% to 10%.

Should CGT fall in line with income tax, liability will go up to at least 18% to 20% or more so, (for most investors/second homeowners) from 28% to 40% for higher-rate payers.

What to do?

As it is still unknown what measures the Chancellor will be taking, it could be sensible to bring any capital gains forward into the current tax year, exploiting the current 10 and 20% CGT rates (18 and 28% for property).

Venture Corporate Finance is a middle-market M&A advisory firm for clients planning to sell their businesses, raise capital, restructure, or grow with acquisitions. We provide independent advice and bespoke transaction solutions to meet their specific objectives.

For more information on corporate finance and M&A services, contact Venture Corporate Finance.